Money and Credit With Limited Commitment and Theft

We study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. Theft matters for optimal monetary policy, but at the optimum theft will not be observed in the model. The Friedman rule is in general not optimal with theft, and the optimal money growth rate tends to rise as the cost of theft falls.

Money and Credit With Limited Commitment and Theft

We study the interplay among imperfect memory, limited commitment, and theft, in an environment that can support monetary exchange and credit. Imperfect memory makes money useful, but it also permits theft to go undetected, and therefore provides lucrative opportunities for thieves. Limited commitment constrains credit arrangements, and the constraints tend to tighten with imperfect memory, as this mitigates punishment for bad behavior in the credit market. Theft matters for optimal monetary policy, but at the optimum theft will not be observed in the model. The Friedman rule is in general not optimal with theft, and the optimal money growth rate tends to rise as the cost of theft falls.Money; Credit; Limited Commitment; Monetary Policy

Introduction to the macroeconomic dynamics: special issues on money, credit, and liquidity

We motivate and provide an overview to New Monetarist Economics. We then briefly describe the individual contributions to the Macroeconomics Dynamics special issues on money, credit and liquidity.Macroeconomics - Econometric models

Optimal monetary policy in a model of money and credit

The authors study optimal monetary policy in a model in which fiat money and private debt coexist as a means of payment. The credit system is endogenous and allows buyers to relax their cash constraints. However, it is costly for agents to publicly report their trades, which is necessary for the enforcement of private liabilities. If it is too costly for the government to obtain information regarding private transactions, then it relies on the public information generated by the private credit system. If not all private transactions are publicly reported, the government has imperfect public information to implement monetary policy. In this case, the authors show that there is no incentive-feasible policy that can implement the socially efficient allocation. Finally, they characterize the optimal policy for an economy with a low record-keeping cost and a large number of public transactions, which results in a positive long-run inflation rate.Monetary policy ; Disclosure of information

Essays on Money and Credit: A New Monetarist Approach

Chapter 1: Money and Credit with Limited Commitment and Theft Credit contracts and fiat money seem to be robust means of payment in the sense that we observe both monetary exchange and credit transactions under a wide array of technologies and monetary policy rules. However, a common result in a large class of models of money and credit is that the optimal monetary policy -- usually the Friedman rule -- eliminates any transactions role for credit: money drives credit out of the economy. In this sense, money and credit are not robust in the model. We study the interplay among imperfect recordkeeping, limited commitment, and theft, in an environment that can support both monetary exchange and credit arrangements. Imperfect recordkeeping makes outside money socially useful, but it also permits theft of currency to go undetected, and therefore provides lucrative opportunities for thieves in decentralized exchange. First, we show that imperfect recordkeeping and limited commitment are not sufficient to account for the robust coexistence of money and credit. Then, we show that theft, together with imperfect recordkeeping and limited commitment, is sufficient to account for the robust coexistence, given that theft imposes a cost on monetary exchange. The Friedman rule is in general not optimal with theft, and the optimal money growth rate tends to rise as the cost of theft falls. Chapter 2: Unsecured Loans and the Initial Cost of Lending We study the terms of credit in a competitive market where sellers are willing to repeatedly finance the purchases of buyers by extending direct credit. Lenders: sellers) can commit to deliver any long-term credit contract that does not result in a payoff that is lower than that associated with autarky while borrowers: buyers) cannot commit to any contract. A borrower\u27s ability to repay a loan is privately observable. As a result, the terms of credit within an enduring relationship change over time according to the history of trades. Although there is free entry of lenders in the credit market, each lender has to pay a cost to contact a borrower. We show that a lower cost makes each borrower better off from the perspective of the contracting date, results in less variability in a borrower\u27s expected discounted utility, and makes each lender uniformly worse off ex post. As this cost approaches zero, the credit contract offered by a lender converges to a full-insurance contract. Chapter 3: Costly Recordkeeping, Settlement System, and Monetary Policy We study an arrangement in which the government provides a public settlement system to the private sector and evaluate its implications for the implementation of monetary policy. A key ingredient of the analysis is that it is costly for the government to operate a record-keeping technology which is necessary for the construction of a settlement system through which private loans and tax liabilities are settled. For this reason, the choice of the optimal size of a settlement system by the government is non-trivial. Another benefit of such a system is that it allows the government to effectively control the money supply. We show that the Friedman rule is suboptimal. Money and credit coexist as means of payment at the optimum. The government relies on a credit system to implement an optimal policy because of the role of credit in relaxing cash constraints. As a result, money and credit are complementary in transactions: the existence of a credit system makes the operation of a monetary system more effective

Optimal monetary policy in a model of money and credit

The authors investigate the extent to which monetary policy can enhance the functioning of the private credit system. Specifically, they characterize the optimal return on money in the presence of credit arrangements. There is a dual role for credit: It allows buyers to trade without fiat money and also permits them to borrow against future income. However, not all traders have access to credit. As a result, there is a social role for fiat money because it allows agents to self-insure against the risk of not being able to use credit in some transactions. The authors consider a (nonlinear) monetary mechanism that is designed to enhance the credit system. An active monetary policy is sufficient for relaxing credit constraints. Finally, they characterize the optimal monetary policy and show that it necessarily entails a positive inflation rate, which is required to induce cooperation in the credit system.Monetary policy ; Money ; Credit

Endogenous credit cycles

We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.

Banking: a mechanism design approach

The authors study banking using the tools of mechanism design, without a priori assumptions about what banks are, who they are, or what they do. Given preferences, technologies, and certain frictions - including limited commitment and imperfect monitoring - they describe the set of incentive feasible allocations and interpret the outcomes in terms of institutions that resemble banks. The bankers in the authors' model endogenously accept deposits, and their liabilities help others in making payments. This activity is essential: if it were ruled out the set of feasible allocations would be inferior. The authors discuss how many and which agents play the role of bankers. For example, they show agents who are more connected to the market are better suited for this role since they have more to lose by reneging on obligations. The authors discuss some banking history and compare it with the predictions of their theory.Banks and banking

Endogenous Credit Cycles

We study models of credit with limited commitment, which implies endogenous borrowing constraints. We show that there are multiple stationary equilibria, as well as nonstationary equilibria, including some that display deterministic cyclic and chaotic dynamics. There are also stochastic (sunspot) equilibria, in which credit conditions change randomly over time, even though fundamentals are deterministic and stationary. We show this can occur when the terms of trade are determined by Walrasian pricing or by Nash bargaining. The results illustrate how it is possible to generate equilibria with credit cycles (crunches, freezes, crises) in theory, and as recently observed in actual economies.

New monetarist economics: methods

This essay articulates the principles and practices of New Monetarism, the authors' label for a recent body of work on money, banking, payments, and asset markets. They first discuss methodological issues distinguishing their approach from others: New Monetarism has something in common with Old Monetarism, but there are also important differences; it has little in common with Keynesianism. They describe the principles of these schools and contrast them with their approach. To show how it works in practice, they build a benchmark New Monetarist model and use it to study several issues, including the cost of inflation, liquidity, and asset trading. They also develop a new model of banking.Monetary policy